Cleveland Allerton Hotel v. Commissioner of Int. Rev.
| Decision Date | 22 March 1948 |
| Docket Number | No. 10558.,10558. |
| Parties | CLEVELAND ALLERTON HOTEL, Inc. v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | U.S. Court of Appeals — Sixth Circuit |
M. R. Schlesinger, of Cleveland (M. R. Schlesinger, of Cleveland, on the brief; Horwitz, Kiefer & Harmel, of Cleveland, of counsel), for petitioner.
Louise Foster, of Washington (Theron L. Caudle, Sewall Key, George A. Stinson, and Louise Foster all of Washington, D. C., on the brief), for respondent.
Before HICKS, SIMONS, and MILLER, Circuit Judges.
The tax problem posed by the present appeal is one for the solution of which there is no precedent. It is clearly a case of first impression, and involves the question whether a lessee in possession, owning and operating a hotel building on leased premises, who purchases the fee from the lessor for a price greater than the value of the land, may allocate a portion of the purchase price to the purchase of the unexpired lease either by deducting the allocated portion as a business expense in the year of purchase or depreciate it over the term of the lease or the anticipated useful life of the hotel building. The Tax Court decided that the petitioner could do none of these things, and the taxpayer seeks review.
The case involves tax liability for 1941 and 1942. Deficiencies were asserted for such years by the respondent. In 1941, the petitioner was the owner of a 16-story brick and steel hotel in Cleveland, built upon leased ground. With details of its acquiring possession, we are not presently concerned. The lease had an unexpired term of 80 and a fraction years, and the ground rent was $25,000 a year. The petitioner concluded that its rent was excessive by at least $15,000 a year, and that ultimately it might lose its building, if it found no escape from the obligation. After negotiating with the owners of the fee, it submitted a written offer to purchase the fee for the sum of $441,250, in cash, and the offer was accepted in writing by the owner of the land. On March 19, 1941, the purchase was consummated by payment of the money and the delivery to petitioner of the lessor's deed, which not only conveyed title to the real estate, but recited that the lease and the estate thereby created should merge in the title, the grantor acknowledging that all of the covenants, provisions, and conditions of the lease had been fully performed.
The petitioner in its tax returns for the tax years sought a deduction in substantial amount for part of the purchase price, on the ground that it was paid, not for the real estate but to be relieved of an improvident rental obligation, that consideration for the release could accurately be measured by the difference between the fair value of the real estate and what it was obliged to pay therefor, and that such amount was an expense of doing business. It here contends that the deduction was allowable in full in 1941, or in the alternative that it should be permitted to amortize it either over the term of the lease or the anticipated useful life of the building. The respondent contends that the deduction may not be granted in either form and the Tax Court agrees.
The petitioner argues that its primary purpose was to buy its way out of that portion of its leasehold obligation which was excessive and that its purchase of the fee was merely incidental to that purpose. It could not, it says, have merely secured escape from a burdensome lease and leave the premises because it owned a valuable building thereon. It had no need for the fee simple title because it already had full possession and use of the land by the provisions of the lease for its unexpired term. Uncontradicted testimony supports the petitioner's assertion of its purpose and the necessity for buying the land to escape from the lease. Its claim that the value of the land was no more...
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